The battle over the role of the unions in Ed Miliband's Labour party intensified on Thursday when Unite the party's biggest donor threatened legal action in an ongoing row over the selection of a candidate in Falkirk.

The former business secretary Lord Mandelson also warned that Labour risked damaging its electoral appeal if unions continued to blatantly manipulate parliamentary selections as it is alleged they have in the seat vacated by Eric Joyce.

Labour has provoked outrage in Unite leadership by taking over the selection in Falkirk after finding evidence that constituency members had allegedly been recruited to the party by Unite without their knowledge. Labour insists that the Unite backed candidate in Falkirk will no longer be standing for the selection.

Unite has responded by accusing Labour of failing to put the allegations to the union and of operating a behind the scenes smear campaign. The party general secretary Len McCluskie has for the first time threatened legal action against the party.

The dispute is creating wider political tensions within the party and the union, including questions over whether Unite is using legitimate tactics to try and influence the selection of fewer Oxbridge educated parliamentary candidates. Unite critics claim the union is using the label working class as a smokescreen for a form of confrontational leftist politics.

Labour this week put the Falkirk party in special measures and said it is more widely reviewing the way in which unions relate to local parties. The conflict has been given added spice since the party's campaigns co-ordinator Tom Watson, a former Unite political officer has defended the actions of the union in Falkirk.

Writing for the Progress website, the centrist Labour pressure group, Mandelson asserts acidly: "Fresh from winning the endorsement of 9.7% of Unite's 1.5 million members to be re-elected as General Secretary, I can understand why Len McCluskey might feel he has earned the right to throw his political weight around". But Mandelson adds Labour general secretary Iain McNicol should make his first priority to ensure unions and other third parties are debarred from paying any individual's party membership, which the party says allows the union additional muscle.

Mandelson says: "Trade unions should, of course, participate in parliamentary selection processes - as should all Labour's affiliates. But they should publish and be transparent about the process by which they decide which candidates to nominate and support and they should allow their members to play a full part in that process".

He adds further such incidents as Falkirk "risk damaging Labour's reputation and undermining our electoral appeal. The stakes in 2015 are too high to allow any such damaging behaviour to get in the way of the election of a Labour government".

He continues "What had been going on in the seat prior to Ed Miliband stepping in and halting the process was a throwback to the kind of politics many of us had hoped had long been put behind us. It is far removed from the 'new politics' that Ed, quite rightly, has sought to encourage under his leadership.

"Let's be clear: those who have protested at these activities do not do so because we are trying to exclude individual trade unionists from influence in the party. Rather we are trying to defend the rights of grassroots members of the Labour party – including trade unionists – to select whomsoever they wish to represent the party at the next general election and to do so free of blatant attempts to manipulate the process by trade union machines."

A furious McCluskey has written to the local party saying "the party nationally has arbitrarily excluded all members who joined the CLP since March 2012 – which includes many of you – from any participation in the process to choose the next Labour parliamentary candidate in the constituency. Second, it has taken the shortlisting of candidates for selection out of the hands of the CLP and given it to a special panel. The aim of the first decision is to exclude trade unionists from the selection process, and the aim of the second is presumably to block any possibility of the Unite-supported candidate being chosen".

He adds: "It is certainly our belief that Labour needs more trade unionists in Parliament, as opposed to seats being handed out on a grace-and-favour basis to Oxbridge-educated "special advisers", but we make no apology for that."